In December 2020, the CEO of Russian retail giant Magnit talked to bne IntelliNews about his plan to turn the company around following a few rocky years of economic shocks and management uncertainties.

Jan Dunning took over the company in 2019 with a plan to put it back on a growth trajectory. His philosophy was based around “customer-centric thinking”, which meant collecting data on shopping habits and reacting quickly to changes in consumer demand.

When he last spoke to bne IntelliNews, Jan was trying to turn Magnit into a big player in the online sphere, had just introduced loyalty cards and was tentatively exploring new formats such as discounter Moya Tsena (My Price).

In the intervening year, Magnit has added RUB300bn (around $4bn) to its total annual revenues. It has acquired retail chain Dixy, established a major presence in e-groceries, and has led the market in like-for-like (lfl) sales growth.

The comeback appears to be complete, and Magnit is rapidly closing the gap with Russia’s biggest retailer X5 – with an expected revenue growth of 18% in 2022, against X5’s 10%, according to research by Alfa Bank.

But with the retail sector set to consolidate at breakneck speed in the coming years, the race is far from over. In an exclusive interview with bne IntelliNews on the company’s Capital Markets Day, Dunning discussed Magnit’s plans to stay ahead of the game as competition heats up in Russia’s retail space.

 

Image credit: Magnit.

 

Understanding consumers

Magnit’s total revenue growth for the Financial Year 2021 was 19.5%. Even when adjusted to account for the huge boost provided by the acquisition of Dixy, this leaves the retailer with a cool 10.8% increase in total revenue. Dunning attributes some of this growth spurt to assorted improvements and a sensitive promo approach, but he’s under no illusions as to the amount of work which still needs to be done.

“The thing we have to focus on now is understanding our customers better,” he says. On its Capital Markets Day on 17 February, the company unveiled a five-year strategy based on margin gains through supply chain optimisation and growing sales densities by opening new stores, refurbishing existing ones and focusing on its digital offering.

Retail is booming in Russia, and so far it’s home-grown players – like Magnit, born in Russia’s fertile South in the city of Krasnodar – which have benefitted the most. Understanding the needs of Russian buyers is undoubtedly a strategic advantage here. But as more players with increasingly large capital reserves try to get a slice of Russia’s retail pie, consumer demand is changing faster than ever.

In a bid to better anticipate this morphing landscape, Magnit introduced loyalty cards in 2019, an initiative which was just beginning to pick up pace at the time of Dunning’s previous interview with bne IntelliNews.

Now, Dunning says proudly, Magnit has 60mn card holders. 69% of sales are done through loyalty cards.

“The next step, once we have the data, is what it tells us. What kind of customers do we have? It’s also interesting to see what kind of customers don’t use a loyalty card, and what’s their behaviour. Is it different from the behaviour of loyalty card holders? How can we make those people become loyal customers? There’s a lot of opportunity still to explore.”

One of the reasons that Magnit’s growth in recent years is quite so impressive is that it has outstripped the growth of Russia’s real economy by a significant margin. Currently, consumers are facing pressures due to stagnant real wage growth and a rising Consumer Price Index.

“Inflation is helpful,” Dunning points out. “On the other hand, the inflation levels that we saw by the end of the year are not helpful. They make it very difficult for the Russian consumer.”

One recent shift in Russian shopping habits is that shops are becoming less frequent and bigger. This could be a response to economic factors or cultural influences coming from abroad, but is also down to a spate of lockdowns which have encouraged consumers to minimise their trips to public spaces.

“Russian consumer behaviour is different from the British or the Dutch,” explains Dunning. “We would go for big shops. The Russians like convenience, close by: ‘I’ll just pop in’. That has changed primarily due to the impact of COVID. Traffic is declining, but baskets are growing.”

Within that trend of growing receipts, two broad options are possible: customers buying fewer higher-ticket items (trading up), or buying more lower-ticket items (trading down).

“We had been seeing a continuous trading up in our customer base, but in December, for the first time in two years, it started to fall. This is a clear indication of consumers having difficulty spending that amount of money. ‘I still need it, but I need it cheaper than I bought it before.’ Customer data is something that we have to understand in the current environment, with the impact of COVID and inflation. We need to stay on top of it, and work out what actions we can take to hedge that development.”

Given the evidence that Russian shoppers are feeling increasingly squeezed, it is no surprise that demand for discount shops is growing. According to retail.ru, the number of discounters in Russia is set to increase by a factor of five within the next five to seven years. This would bring the market share of the discount format in Russia close to European levels.

In step with this trend, Magnit has been rolling out its discount format Moya Tsena (My Price). At the time of Dunning’s last interview with bne IntelliNews there were fewer than 15 My Price stores in existence; now there are over 210.

“My Price is a soft discounter – it clearly addresses the demands of the Russian consumer at the moment. We’re planning to open hundreds more this year.”

A "My Price" store.

Image credit: Magnit.

 

Logistics

Magnit operates more than 26,000 stores across Russia. In the world’s biggest country, a logistical operation like that is no mean feat.

“Especially on the fresh side, there’s a strong regional market,” Dunning points out. “In dairy, we have regions where 60% of sales are from the local assortment. On the fresh side, Russia is still very locally oriented. That’s not a surprise, because looking at the size of the country, it’s still very difficult to ship fresh products across the country. You can’t just put milk on a truck and say ‘go to Novosibirsk’. The cost of the article would be so inflated that it’s not realistic. I think that’s why it’s very important that we as a retailer stimulate cooperation with local players. We have nine regional procurement officers, to make sure that we have a local assortment in our stores.”

Magnit took on an extra logistical puzzle this year when it acquired retail chain Dixy. Integrating new assets is notoriously hard work, but it’s a necessary step in a market which is rapidly consolidating. Rival retailer Lenta recently acquired Billa, Semya and e-grocer Utkonos.

In Russia, the top-five retailers hold about 40% of the market share, compared with over 70% in Germany, so many more acquisitions are likely on the horizon for the likes of Magnit.

The process of integrating Dixy was a rapid one. Dixy’s CEO stayed in place, as did its supply chains, and Dunning hopes that its customer base will also continue shopping with the chain.

“In acquisition, that’s the mentality that you need to have. If your behaviour is like a predator, you potentially lose a lot of synergies,” Dunning commented.

Having put the finishing touches to the integration of Dixy at the end of 2021, the job for Magnit now is to identify efficiencies which can be gained from aligning the assortments of the two chains.

“Are there SKUs [Stock Keeping Units] that we should add to our assortment, or they should add to their assortment? The smaller synergies we can still achieve are on the cost side: can we buy the same equipment, the same shelving? So there are gains still to come.”

Magnit's share price soared relative to peers following news of the acquisition of Dixy.

 

Online

Another big undertaking has been the attempt to break into the highly competitive online market. Many of Russia’s biggest e-commerce players are backed by tech giants, giving them enormous capital resources and a software edge.

In December 2020, Dunning told bne IntelliNews that “we have to be digital and we need an e-commerce platform and by next year we will be an active e-commerce player.”

Sure enough, Magnit’s e-commerce business has scaled up rapidly over the past year.  On December 30 Magnit fulfilled over 100,000 orders as New Year shopping peaked. It delivers from over 5,000 stores, and claims to be able to deliver in as little as 15 minutes in some areas.

“We are now an active e-grocery player in the market. We do it a bit differently to some of the other players: we’ve focused on partnerships from the start. Why not use the competence of other companies and our critical mass in volumes to co-operate?”

Much like his light-touch approach to integrating Dixy and his insistence on adapting to customer demand, flexibility defines Dunning’s approach to delivery too.

“Although there are a lot of players, the opportunity is definitely there. This comes back to our flexibility: we have different models. We’re starting click and collect in cosmetics, and we might potentially try a ‘milk run’ approach rather than a ‘taxi’ approach for delivery. We’re exploring still.”

Magnit’s omni-channel approach was another key takeaway from its Capital Markets Day. The strategy has been successful so far, and Magnit hopes that it will help the company sustain an EBITDA margin of 8% over the next three years, rising even higher after 2025. It plans to open 8,000 more stores between 2022 and 2025 as well as growing its online business.

 

Staying ahead of competition

In such a fiercely competitive sector with so many moving parts, it takes a good deal of planning to stay ahead of the curve. 2022 is likely to be a busy one for Russia’s leading retailers as consolidation continues apace.

But there’s only so much planning that can be done in the business of takeovers. “It’s difficult to forecast. I can’t say ‘we’re going to do five acquisitions this year’. Maybe we aren’t going to do any, because deals have to be made. People know our approach: we want value-accretive acquisitions, and they must add to shareholder value. That’s more interesting to the ones being taken over too, because becoming part of a more valuable organisation makes more sense than diluting another business.”

Dunning also identifies supply chain efficiencies as an area to work on to give Magnit an edge in 2022.

“Why not also look at vertical integration opportunities? We grow our own tomatoes and cucumbers. We understand price dynamics, we understand how fertilisers work, what happens to the soil, and to seeds.”

The advantage of own-brand goods was cast into sharp relief this year when supply chain problems and price inflation wrought havoc on the provision and cost of goods from external sources.

“We have our own sweets, we have our own chocolate, we have our own pasta, we have our own mushrooms. And we have 13 factories where we produce food products.”

Dunning is bullish about the new financial year and the opportunity it brings. It’s going to be a demanding year by all accounts, with no signs that inflation is letting up – but nor is Magnit’s strategy of constant experimentation and flexibility. This year will see My Price rolled out further, alongside a potential pilot of a hard discounter format. It will see the expansion of Magnit’s e-commerce business, including various pick-up and delivery methods, and the further integration of Dixy with Magnit. Watch this space.